|Mortenson stepped down as executive director last year, though he remains an employee of the organisation.
Greg Mortenson, the former head of a non-profit organisation in the US which has built hundreds of schools in Afghanistan and Pakistan, will repay more than $1m to the charity, according to a settlement agreement.
Mortenson, the author of Three Cups of Tea, founded the Central Asia Institute (CAI) in 1996.
He was accused last year of embezzling money from the charity, and of fabricating passages in the book, which recounts his inspiration for founding the charity.
The settlement was announced on Thursday by Steve Bullock, the attorney general in the US state of Montana, who said Mortenson made "significant lapses in judgment".
"CAI’s mission is worthwhile and important ... [but] it’s essential that the money be spent as intended," he said.
"When it’s not, underlying public trust is eroded, and hard to restore."
The CAI spent nearly $4m buying copies of Mortenson’s books for libraries, schools and other organisations, as a way of promoting its work; Mortenson was supposed to reimburse any royalties he received.
But an investigation by Bullock’s office found that Mortenson kept more than $270,000 in royalties.
The charity also spent hundreds of thousands of dollars paying travel expenses for Mortenson, who has delivered more than 500 speeches over the past few years.
In many cases, though, he was also receiving a travel stipend from the groups sponsoring his talks, he kept those payments, the Montana investigation found.
"Mortenson was ‘double dipping’," the investigation concluded. "His travel expenses were, in many cases, paid twice: by both CAI and event sponsors."
The investigation also uncovered about $75,000 in "inappropriate charges" on the charity’s credit cards, and several other improprieties.
Mortenson stepped down from his post as executive director last year, though he remains an employee of the organisation.
The settlement requires that a new executive director to be hired, and that the two remaining board members step down.